My Lords, these amendments, debated in the last session, concern trustees’ duties and protections, the design of the savers’ interest test, the risk of regulatory herding and the proportionality of the penalty regime.
I start with the operation of the savers’ interest test and exemptions for many future asset allocation requirements. Amendment 140, from the noble Baroness, Lady McIntosh, would remove the provision that an exemption, once granted under the savers’ interest test, applies only for a period specified by the authority. In practice, this would allow an exemption to become open-ended. Amendment 141 would prevent schemes from being required to change their asset allocation while an application or appeal under the savers’ interest test is pending and it would secure the ability to apply for an exemption for up to three consecutive years.
We need fair and transparent procedures when exemptions are granted or withdrawn. But the Government’s intention is that exemptions should be capable of adapting to changing circumstances rather than becoming de facto permanent exclusions. Market conditions, whether in terms of fees or the availability of suitable opportunities, can and do change. A permanent exemption, as Amendment 140 would allow, could end up entrenching a competitive advantage for particular providers long after the original justification had fallen away.
On Amendment 141, many of the procedural safeguards that the noble Baroness seeks are already enabled by the Bill. New Section 28C allows regulations to set time limits for decisions on savers’ interest applications, to specify the period an approval lasts, to set rules around withdrawals and to require advance notice to be given. Those are the right vehicles for detailed processes to be determined—by regulators and in consultation with industry. The powers do not cap the number of times that an exemption can be renewed, so I assure the noble Baroness that multiyear relief will already be possible where justified.
Turning to trustees’ duties, Amendments 146 and 147, from the noble Baroness, Lady Bowles, address how these new powers sit alongside fiduciary responsibilities. Amendment 146 would say expressly that nothing in this chapter overrides or diminishes trustees’ duty to act in the best financial interests of members. I entirely agree about the importance of that duty. But, as I have said, the Government would not be proposing these powers if there were not strong evidence that savers’ interests lie in greater investment diversification than we see today in the market.
In the last session, the noble Lord, Lord Sharkey, challenged me on the strength of the saver benefits, referring to analysis by the Government Actuary’s Department, which, in illustrative modelling for DWP, found a 2% uplift in a typical saver’s pension pot from a hypothetical private markets allocation. That analysis is just one of various reports that show the benefits of diversification and the potential for higher risk-adjusted returns from a more diversified portfolio. Some of that evidence is referenced in the DWP paper to which the noble Lord referred. As another example, a British Business Bank report identified a potential uplift of 7% to 12% from a 5% allocation to venture capital.
I do not think I was suggesting that it was an anti-competitive move by the pensions industry, but there are segments in it that are advantaged by it. The other concern is that the meetings that took place prior to the signing of the Mansion House agreement were very particular to certain types of organisation; I have yet to know of any that really had interests in listed investment companies or of any of them that were invited. Perhaps the Minister does not know because this is not her field, but I have to say, I am very concerned that this has been a secretive consultation, not a public consultation, among a selection rather than among the many.
My Lords, I am not going to say any more than I have now. The noble Baroness has made a series of complaints about cartels, secrecy and lack of integrity—all kinds of things—none of which are merited. I simply felt that I needed to put something on the record to counter that, and I do not have anything to add. We have made it clear that these were iterative discussions with the industry, looking at what was going to happen specifically in relation to the accord, and I have made the Government’s view on that clear.
On enforcement, Amendment 145, to which the noble Baroness, Lady Stedman-Scott, has added her name, probes whether the maximum penalty of £100,000 per employer in new Section 28I is proportionate. We have worked closely with the regulators and benchmarked against comparable penalty regimes. The intention is to set a maximum that is meaningful as a deterrent to wilful or repeated non-compliance but is not routinely applied. I assure the noble Baroness that it is a cap, not a fixed sum, so the regulators will take account of the facts in each case; in practice, the potential loss of qualifying scheme status for auto-enrolment is likely to be a far more significant consequence than any fine.
We are keen to work with schemes, trustees and providers to ensure that any future use of the reserve asset allocation powers, were that to come to pass, is carefully targeted, evidence-based and consistent with trustees’ duties. We believe that the Bill provides the right framework, including the savers’ interest test, the requirement for a prior report and a proportionate enforcement regime. In the light of all that, I hope that noble Lords can withdraw or not press their amendments.
My Lords, I am grateful to the Minister for summing up, albeit that there has been a delay of some two working days. I thank everyone who has spoken. I offer a particular thank you to the noble Baronesses, Lady Altmann and Lady Bowles, for lending their support to Amendments 140 and 141.
I note that, in summing up, the Minister said—it was in relation to the amendment in the name of the noble Lord, Lord Vaux, I think—that statutory guidance will be issued. I make a plea: could that be made available before Report, or certainly before the Bill receives Royal Assent, to enable trustees to have sufficient time to prepare in this regard? I do not know whether we have a date for that.
In relation to Amendments 140 and 141, I could not have put it better than my noble friend Lady Stedman-Scott did in summing up when she said:
“They make the framework that the Bill creates more robust, transparent and defensible”.—[Official Report, 26/1/26; col. GC 287.]
Therefore, I am grateful for this opportunity to debate these two amendments, as well as this group of amendments per se, but, for the moment, I beg leave to withdraw the amendment.
167: After Clause 41, insert the following new Clause—
“Pension value protection for default arrangements investing in qualifying assets(1) This section applies to a Master Trust scheme or a group personal pension scheme where—(a) an individual’s rights have been accrued wholly or partly through automatic enrolment, and(b) all or part of those rights have been invested in a default arrangement which includes qualifying assets in accordance with any agreement or policy statement made by the Government concerning minimum or expected allocations to such assets.(2) Upon the individual becoming entitled to receive retirement benefits under the scheme, the trustees or managers must obtain an actuarial assessment of—(a) the net investment return attributable to the qualifying assets held within the default arrangement over the period during which the individual’s rights were so invested, and(b) the net investment return that would have been achieved over the same period had those assets instead been invested in a prescribed benchmark fund.(3) For the purposes of subsection (2)(b), “prescribed benchmark fund” means a diversified, low-cost equity index fund of a description specified in regulations.(4) Where the actuarial assessment shows that the return attributable to the qualifying assets is lower than the return of the prescribed benchmark fund, the Secretary of State must, in accordance with regulations, secure that a payment is made by the Department for Work and Pensions to the individual equal to the difference, within a timeframe determined by regulations. (5) Regulations under this section may make provision about—(a) the form and content of actuarial assessments,(b) the appointment and qualifications of actuaries,(c) the methodology for attributing returns to qualifying assets,(d) the manner and timing of any payment under subsection (4),(e) cases in which no payment is required, including where differences are de minimis, and(f) the recovery of costs from prescribed pension schemes or prescribed persons.(6) The Secretary of State must publish guidance about the operation of this section, including guidance on the protection of members who remain invested in default arrangements throughout their working lives.(7) Regulations under this section are subject to the affirmative procedure.”Member’s explanatory statement
This new Clause would require the Secretary of State to make provision for paying the difference (if any) between returns on investments into qualifying assets held within default arrangements and returns on the same investment, had they been invested in a “prescribed benchmark fund”, meaning a diversified, low-cost equity index fund.
My Lords, my noble friend Lord Sharkey sends his apologies; he is at a funeral and will read Hansard with great attention. I thank the noble Lord, Lord Vaux, for supporting me on Amendment 167. I think it is the first time in 15 years that I have degrouped an amendment to stand by itself, but I can see no other way to ensure a clear answer from the Government: will they put their money where their mouth is?
The Committee has discussed qualified assets and, while I do not intend to repeat the discussion, I hope that everyone understands how high risk a portfolio of such assets is. The Financial Services Regulation Committee, in January, titled its look at the private equity markets as Private Markets: Unknown Unknowns. Some 75% of firms invested in by venture capital fail. Complex infrastructure is both high risk and illiquid; we can think HS2, the Elizabeth Line—four years delayed and £4 billion over budget—and Hinkley Point, which seems to run out of money time after time. If someone with a substantial pension wants to invest in such assets, that is fine with me, but the Mansion House Compact—or accord, I do not care which terminology is used—covers only auto-enrolment default fund pension schemes. These are vehicles for those with the narrowest shoulders, with low incomes, small pensions and little financial knowledge. The downside risk for them means poverty.
The Government have assured us, and those pension savers with the narrowest shoulders, that under the Mansion House Compact, and by putting 10% of their pensions into qualified assets, they will be winners —to quote the Minister on the first day in Committee:
“with an average earner potentially gaining up to £29,000 more by retirement”.—[Official Report, 12/1/26; col. GC 205.]
No warning of the downside was mentioned and clearly, to the Minister, the downside does not seriously exist. I challenge that. I am always very wary of promises of low-risk, high-return investments.
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There is a fair degree of consensus around this in the pensions industry. Indeed, the Mansion House Accord explicitly cites the potential for higher risk-adjusted returns as its core justification. The fact is that we are an international outlier. Meanwhile, Australian and Canadian pension funds are investing in the UK, owning airports, roads and telecom companies, making the most of the opportunities available to invest in this country while seeking good returns for their savers.
When it comes to the reserve asset allocation power, as noble Lords know, before it can be exercised, the Government must publish a report on the likely impact on savers. Where asset allocation requirements are in place, the savers’ interest test allows a scheme to seek an exemption if it can show that compliance would cause material financial detriment to members. Crucially, nothing in the Bill disapplies trustees’ existing duties of loyalty, prudence and acting in members’ best interests. These continue to apply.
Our concern with Amendment 146 is that it could cast doubt on the binding nature of any requirements introduced under these powers by implying that trustees can simply disregard them wherever they assert that they are acting in members’ interests. The right place to consider scheme-specific departures is the savers’ interest test, which is overseen by the regulator.
We do not agree with Amendment 147 for similar reasons. It seeks to create a broad statutory safe harbour from penalties or consequences for trustees who fail to meet asset allocation requirements where they believe that they are acting in members’ best interests. The Bill already recognises that there will be circumstances where exemptions are justified and provides a structured route to secure them. A blanket safe harbour would risk undermining that framework.
Amendment 148, which is also from the noble Baroness, Lady Bowles, would place a new statutory duty on trustees to have regard to systemic risks, including economic resilience and climate change. I very much agree with the noble Baroness that such risks can materially affect long-term pension outcomes, and trustees should take them seriously. Our concern is that a new open-ended duty, using terms such as “systemic risk” and “economic resilience” without detailed definition, risks increasing legal uncertainty and costs for trustees without clear benefit. Our preferred approach is to work with the sector on strength and guidance for trust-based private pensions, clarifying how trustees can take account of systemic and sustainability risks within their existing duties.
The noble Lord, Lord Sharkey, pressed me last Monday on the timings of this work. I can confirm that the work is already under way and that an initial round table, with representatives from across the pensions sector and led by the Pensions Minister, took place yesterday. The Pensions Minister has confirmed that he will be convening a technical working group to take this work forward and that there will be a full consultation on the draft guidance later in the spring.
The noble Lord, Lord Sharkey, also asked whether that guidance would clarify the application of the reserve power. The guidance is not conceived as part of our implementation of these reserve powers, which, as I take every opportunity to remind the Committee, may well never be exercised. Rather, its purpose is to address inconsistent interpretations of investment duties across the trusteeship landscape and support everyday investment decision-making. As noble Lords may well be aware, there has been an active area of discussion within legal and financial circles for many years. The recent work of the Financial Markets Law Committee has played an important role in shaping the debate on the extent to which factors such as climate change, quality of life in retirement and sustainability should be considered in investment decisions. Building on that, our forthcoming statutory guidance is intended to provide clear and practical support to trustees on how these factors should be taken into account, ensuring confidence and consistency.
Amendment 142 from the noble Lord, Lord Vaux of Harrowden, deals with a concern about what happens if qualifying assets were to perform poorly, an issue also raised by the noble Baroness, Lady Stedman-Scott, last week. This amendment would require the regulator to indemnify schemes against costs or liabilities if members’ returns are worse than they might have been without any mandated allocation. I recognise the question, but I say again that the Government would not be proposing these powers if we did not think change from the status quo was in savers’ interests. These powers would only ever be used following a statutory impact report and with the savers’ interest test in place.
As I have said previously, trustees continue to be responsible for investing in their savers’ interests. That means savers would continue in all circumstances to be protected by the core fiduciary duties of trustees to act with loyalty, honesty and good faith to savers, and trustees would continue to be subject to a duty to invest in savers’ best interests, in line with the law. We expect that duty would certainly apply to the selection of individual investments in a portfolio; to the balance of different asset classes in a portfolio, including the balance between private asset classes; and to any decision to apply for an exemption under the savers’ interest test. If a provider felt the asset allocation requirement was inappropriate for their circumstances, we would expect their existing duties to guide them to submit an application for exemption to protect their savers’ interests.
There are also, I must say, some significant drawbacks with this amendment, which is not dissimilar to Amendment 167—we are going to cover that in the next grouping, so I apologise if I end up being a little bit repetitive then. An indemnity of this kind would in practice mean that taxpayers and levy-paying firms would underwrite individual schemes’ investment decisions. That would create serious moral hazard and encourage excessive risk-taking, on the basis that any losses could be socialised while any gains would accrue to the scheme. It would also be very hard to operate in practice. Identifying the portion of any loss attributable specifically to the qualifying assets, as distinct from the wider portfolio or market factors, would be highly contentious.
Amendment 150 from the noble Baroness, Lady Bowles, seeks to ensure that the Secretary of State avoids mandating or promoting investment in ways that create herding and to emphasise diversification in guidance. I entirely agree that we must avoid perverse herding effects. At present, DC schemes’ exposure to private markets is relatively low. As that changes, the breadth of potential qualifying assets, infrastructure, property, private equity, venture capital, private credit and others, together with the requirement for a prior report to Parliament, should help to mitigate herding. But while we will need to be alert to this, we do not believe an additional statutory duty is needed. Indeed, schemes will continue to be subject to existing rules and regulations in this area, such as the Occupational Pension Schemes (Investment) Regulations 2005, which require the assets of trust-based schemes to be
“properly diversified in such a way as to avoid excessive reliance on any particular asset”.
Amendment 149, also from the noble Baroness, Lady Bowles, would ensure that listed investment companies and trusts can be treated as qualifying assets on the same footing as other collective vehicles. We have had many an opportunity earlier in Committee to discuss in detail the matters relating to investment companies, so I will not rehearse arguments made previously. But, as I said last week, the design of this reserve power is deliberately aligned with the commitments made by industry under the Mansion House Accord. I have circulated to noble Lords links to the relevant Q&A materials, which I mentioned last Monday in Committee, and which can be found on the websites of Pensions UK, the ABI and the City of London.
The noble Baroness has asked periodically who is responsible for the approach taken to funds. I cannot speak to individual decision processes; what I can do is to echo what I said last week. The signatories self-evidently supported the scope that was eventually drawn, but so did the Government—we have been quite clear about that. Based on my knowledge of the conversations in which the Government were involved, I can also say that government support for this position was not in any way the result of pressure on the Government from signatories or the representative bodies, so the idea that this is some sort of anti-competitive move by the pensions industry is completely misconceived. Instead, it simply follows the logic—
The Government have argued that the Mansion House Compact, combined with the provisions in this Bill, brings great benefits because risk can in effect be eliminated by the structures that have been introduced and the use of large providers. I want to challenge some of those shibboleths. Large providers have explained to me that they can enhance pensions and use qualified assets safely through lifestyle investing, where more is invested into high-risk assets early in the life of the pension, switching later to low-risk investments. If I lose £100 in the first year that I save in a pension, the loss is compounded through the life of the pension and I will have thousands less to get me through retirement. If I lose £100 the day before my pension matures, I lose £100. Early losses are never made up by later gains because they in no way enhance the performance of other assets in the portfolio. If you lose on A, there is no sudden guarantee that you will gain on B. Lifestyle investment is a marketing tool to sell schemes to the financially anxious.
The Government and the Minister argue that the risks in qualified assets can be mitigated away through diversification. For a fund fully invested in good-quality assets, such as the FTSE 100 or the S&P 500, I see the argument for diversification to manage risk, but diversification loses its effectiveness in high-risk portfolios, as everyone should have learned from the collateralised debt obligation scandal that triggered the financial crisis in 2008. Let me illustrate with an extreme example. I go to the casino, maybe several casinos. I play the slot machine, roulette and blackjack. I am beautifully diversified. But we all know that I will still lose my money.
The Government’s case that pensioners with the narrowest shoulders should be 10% invested in qualified assets really depends on assumptions that it makes about asset allocation. The argument is that the pension companies involved would employ the best experts to pick winners among those qualified assets. Some experts are better than others, though I note that they all will find statistics and present them to show that they have the Midas touch.
I note the analysis of the Government Actuary’s Department, which shows that over time and on average—that is a key word—virtually every model portfolio tested delivers similar results. But there is a catch, as the noble Lord, Lord Sharkey, pointed out last week—the GAD’s conclusion underscored its uncertainty. It said that
“there is considerable uncertainty, particularly with the assumptions for projected future investment returns”.
The noble Lord, Lord Sharkey, also quoted from the Institute and Faculty of Actuaries, which made the point even more forcefully. I could not work out what the mean looked like when I looked at that work done by the government department. Obviously, the mean really matters because an average can be made up of a few big winners and a lot of small losers. It is the losers in the high stakes game of qualified assets that worry me.
I am not attempting to stop the Mansion House Compact and the Government’s plan to put 10% of the assets of auto-enrolment default funds into qualified assets even though they are unlisted, opaque, high-risk and illiquid. My amendment would simply require the Government to provide a safety net for those who are in no position to live with the downside in these investments.
The noble Lord, Lord Davies of Brixton, last week said that
“the inevitable corollary of mandation”,
which is where he was focused,
“is responsibility for the outcome”.—[Official Report, 26/1/26; col. GC 284.]
But I regard the Mansion House Compact as very much a government-driven agreement designed by the industry to head off even more coercive action and so I think that the same principle applies: “responsibility for the outcome”.
My amendment is simple:
“Upon the individual becoming entitled to receive retirement benefits under the scheme, the trustees or managers must obtain an actuarial assessment of—
(a) the net investment return attributable to the qualifying assets held within the default arrangement over the period during which the individual’s rights were so invested, and
(b) the net investment return that would have been achieved over the same period had those assets instead been invested in a prescribed benchmark fund”.
In the amendment, benchmark fund
“means a diversified, low-cost equity index fund of a description specified in regulations”.
If the benchmark fund would have performed better, the Government make up the difference to the pensioner. The calculation, despite what the Minister said, is very simple, requires no new data and can be crafted straightforwardly. Pension schemes would just code it into their normal reporting.
If the Minister and the Government are right, and investment in qualified assets, as structured under the Mansion House Compact and in this Bill, benefits and does not harm pensioners in auto-enrolment default schemes—those people I described at the beginning with the narrowest shoulders and least able to take risk—it costs the Government absolutely nothing to sign up to this protection provision. If the Government believe their own words, accepting my amendment means taking no risk at all for the Government or taxpayer. My amendment only costs the Government money if they are wrong in the promises that they are making. The amendment would certainly give peace of mind to the poorest pensioners and strengthen their confidence to save and to invest.
We all want auto-enrolment to better serve low earners, but that requires shaping policy around the capacity of low earners to take risk. I ask the Government to put their money where their mouth is and provide the pension value protection described in my amendment. I beg to move.